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Horizontal Diversification and Vertical Contracting: Firm Scope and Asset Ownership in Taxi Fleets

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  • Evan Rawley
  • Timothy Simcoe
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    Abstract

    This paper considers the vertical implications of horizontal diversification. Many studies have documented organizational problems following corporate diversification. We propose that selective vertical dis-integration – shifting asset ownership to agents – can mitigate rent-seeking and coordination failures in the diversified firm. We test this proposition in a particularly simple setting that allows us to isolate the effects of interest and control for the likely endogeneity of diversification: taxi fleets that diversify into the limousine, or black car, segment following a wave of entry deregulation in the early 1990s. The results show that taxi fleets are substantially more likely to use owner-operator drivers following diversification. Moreover, diversified fleets that use a greater share of owner operators are more productive than diversified fleets that own most of their vehicles. We interpret these findings as evidence that firms re-organize in response to the challenges of diversification, and that there are causal links between the horizontal and vertical boundaries of the fleet.

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    File URL: ftp://ftp2.census.gov/ces/wp/2008/CES-WP-08-10.pdf
    File Function: First version, 2008
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    Bibliographic Info

    Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 08-10.

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    Length: 38 pages
    Date of creation: May 2008
    Date of revision:
    Handle: RePEc:cen:wpaper:08-10

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    1. David S. Scharfstein & Jeremy C. Stein, 1997. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," NBER Working Papers 5969, National Bureau of Economic Research, Inc.
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    6. Hart, Oliver D. & Moore, John, 1990. "Property Rights and the Nature of the Firm," Scholarly Articles 3448675, Harvard University Department of Economics.
    7. Belén Villalonga, 2004. "Does Diversification Cause the "Diversification Discount"?," Financial Management, Financial Management Association, vol. 33(2), Summer.
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    14. Francine Lafontaine & Kathryn L. Shaw, 2001. "Targeting Managerial Control: Evidence from Franchising," NBER Working Papers 8416, National Bureau of Economic Research, Inc.
    15. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
    16. Belén Villalonga, 2004. "Diversification Discount or Premium? New Evidence from the Business Information Tracking Series," Journal of Finance, American Finance Association, vol. 59(2), pages 479-506, 04.
    17. George P. Baker & Thomas N. Hubbard, 2003. "Make Versus Buy in Trucking: Asset Ownership, Job Design, and Information," American Economic Review, American Economic Association, vol. 93(3), pages 551-572, June.
    18. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
    19. Sharon Novak & Scott Stern, 2007. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," NBER Working Papers 13232, National Bureau of Economic Research, Inc.
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